Lecture 4 - The EU customs union

Question 1

When did the EU CU start and when was it completed?

Answer 1

The EU CU started in 1958 and was completed in 1968

Question 2

What does CU theory predict?

Answer 2

CU theory predicts:
- increased trade between member countries
- increased specialisation in production
- a one-off increase in output and income as resources move to more efficient uses

Question 3

What effect did the EU CU have on its member countries?

Answer 3

The EU CU generated rapid trade growth in economic capital between 1958 and 1972:
- EC growth of 15% a year between member countries
- EC growth of 8.5% a year with non-member countries
- Growth of 8.5% a year compared with world trade growth

Question 4

What was the effect on the UK of joining the EU customs union?

Answer 4

The UK joined the EU in 1973:
- The UK experienced increased competition and efficiency
- The UK gained an estimated 1.5% of value added in manufacturing

Question 5

What is Intra-Industry trade (IIT)?

Answer 5

IIT occurs when a country simultaneously imports and exports products of the same industry

Question 6

Why does IIT occur?

Answer 6

IIT occurs because:
- many products are branded and produced in a number of varieties which gives consumers more choice
- but more varieties adds to costs and reduces economies of scale
- In a monopolistically competitive market, the trade off between more choice and more economies of scale is balanced